As the summer heat raises temperature levels, consumers are increasing their natural gas consumption in order to keep their homes and businesses air conditioned. Many hedge funds saw this as prime opportunity to capitalize on the correlating stock prices, leading to a 12-week period of increased long positions. However, as prices climb unexpectedly high, a bearish sentiment on natural gas prices has settled across the country. As a result, many long positions associated with the two primary futures and options contracts for Henry Hub are being dumped.

A Significant Decline in Natural Gas Futures

Natural Gas saw a hefty increase leading up to June 6, 2017 in interest that led to a 12-week increase in long positions, totaling 1,721 billion cubic feet. According to the U.S Commodity Futures Trading Commission, this optimism brought hedge funds up to near record levels, accumulating a net long position of 3,919 billion cubic feet by May 23rd. However, according to Nasdaq.com, sentiment has recently reversed, with reductions of long positions totaling over 1,349 billion cubic feet in the past few weeks.

A Quick Reversal

Prior to the pessimism, hedge fund managers held five long positions for each short position in natural gas. This would mark the biggest bullish bias ever recorded. Overtime, the high prices were noted by analysts to be highly susceptible to a market correction, which may have been a trigger for the recent reversal. This is because although natural gas stocks have risen accordingly to increasing natural gas prices, many power producers are reverting back to burning coal, decreasing overall demand.

With indication of a market correction, the speed at which managers have been short selling have increased drastically. In the two weeks leading up to June 6th alone, more than 896 billion cubic feet worth of short positions were established. As a result, sentiment has reversed, pushing gas prices down, especially in the short term.  As events unfold, Henry Hub has seen its gas price for delivery in July 2017 fall by over 40 cents per 1 million BTUs, a drop of 12% since May 22nd. This is in contrast to July 2018 prices that only fell by 2 cents in the same period. This short term gas price drop should push gas prices low enough in order to entice electricity producers such as Antero (NYSE:$AR) and BHP Billiton (NYSE:$BHP) to shift away from burning coal, and back to natural gases.

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